Investment-grade bond yields rose
Investment-grade bond yields rose in the week ended April 22, 2016, following a rebound in oil prices and favorable economic data. With the rise in oil prices, inflation may rise, strengthening the Federal Reserve’s case to raise interest rates this year.
The Fed is unlikely to raise interest rates in its April 26–27 Federal Open Market Committee meeting, but investors will closely watch for cues of a rate hike in June. The Fed has already indicated that it will remain cautious in raising rates in the wake of the global economic slowdown and falling commodity prices.
Investment-grade bond yields usually take cues from the Treasury yield curve. Last week, Treasury yields rose across the yield curve due to risk-on investor sentiment with the oil price rebound.
Yield movement and investment impact
Corporate bond yields as measured by the BofA Merrill Lynch US Corporate Master Effective Yield fell by three basis points from the previous week, ending at 3.1% on April 22, 2016, the lowest level year-to-date.
The PIMCO Total Return Fund Class A (PTTAX) provides broad exposure to US investment-grade bonds. PTTAX invests in the investment-grade corporate bonds of companies such as Wells Fargo (WFC), Bank of America (BAC), and UBS Group (UBS). PTTAX fell 0.3% week-over-week.
Similarly, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) provides exposure to US investment-grade corporate bonds. Debts issued by companies such as Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among the major holdings of LQD. Due to a fall in yields, LQD rose by 0.1% week-over-week.
In this series, we’ll look at investment-grade corporate debt issuances for the week ended April 22 in detail. But first, let’s take a look at how yields and spreads have fared so far in 2016.